The Court of Auditors Annual Report on the financial year 2010 together with the Commission replies is the outcome of an intensive and constructive dialogue between the two institutions.

The spirit of good cooperation has become an important element in the whole process. I would like once again to thank President Caldeira, the Members of the Court and their services for this excellent cooperation.

The report is published at a time when crucial changes both in the European Union's financial situation and in the future management of its budget are being discussed.

The discussions on the new multi-annual financial framework, the future sector legislation and the revised Financial Regulation are of paramount importance for improving the financial management of the next European programmes.

In this context, it is even more important to have clear, stable and consistent criteria against which the Commission's and Member States' performance is measured and assessed.

We need to ensure that our stakeholders receive comparable and consistent information on expenditure, errors, corrective measures and systems performance to allow them measuring progress over the years.

The correct implementation of EU policies requires robust and effective management and control mechanisms. The Commission has therefore made proposals in the revised Financial Regulation. They should help achieving a cost-effective control and management structure, in particular in the area of shared management.

Let me now refer to the key messages of the annual report as outlined by President Caldeira.

The Annual Accounts

As regards the annual accounts, the Court issued for the fourth consecutive year an unqualified positive opinion. I am pleased that the efforts of our accounting reform led once again to such a positive assessment by the Court.

The Court, nevertheless, expresses concerns about the lack of systematic clearing of pre-financing. The Commission has proposed to include in the Financial Regulation a provision making regular clearing of these payments compulsory. The Commission counts on the co-Legislators to support this proposal.

The Court has also found that some payments made by National Authorities to Financial Engineering Instruments were to be treated as transfers of assets rather than as expenses.

For 2010, this problem has been solved after the Commission invited the Member States to provide the necessary data on a voluntary basis.

The Commission has already proposed improving the current legal basis. It will enable to obtain systematically from the national authorities the information needed for a correct accounting treatment.

It will also contribute to an adequate monitoring by the managing bodies in the Member States.

In 2010, the Pre-financing amounts increased to 54.2 billion euro including the adjustment of 4.8 billion euro relating to Financial Engineering Instruments. As I said earlier, this is an issue that the Commission intends to closely follow up from a management and accounting viewpoints.

In 2010, the budgetary surplus amounted to 4.55 billion euro covering both revenues and expenditure. The increase is partly due to the fact that the budgetary authority did not manage to approve the usual amending budget that the Commission proposes at the end of the year.

However, the increase of the surplus was also linked to under-implementation of expenditure across many areas totaling 2.73 billion euro. This increase results, in particular, from a stronger preventive approach by the Commission.

The most significant amounts came from the European Social Fund where the Commission followed a strict policy of interruption and suspension of payments.

Legality and regularity of transactions

With regard to the legality and regularity of transactions, we have almost kept the status quo. I would like to acknowledge significant improvements in a number of areas and the continuation of the positive trend of last year, except for cohesion policy.

First, as last year, the overall most likely error rate for all EU spending is still below 4%. This means that the vast majority – over 96% of total payments made in 2010 - are free from material error. In addition, all commitments in all policy areas and revenue for the entire EU budget, were free from material error

Second, we got positive results for policies directly managed by the Commission. Areas such as Research and other internal policies, External aid, Development, Enlargement and Administrative expenditure keep improving. The error rate for the respective chapters in the Court's report is below the materiality threshold.

Third, the situation in Agriculture remains stable with a level of error close to the materiality threshold of 2%. Moreover, for 2010, the Court confirms that direct subsidies payments to millions of farmers, representing nearly 40 billion euro, were free from material error.

As far as cohesion policy is concerned, the error rate went up with 2 percentage points compared to 2009. However, it is important to stress that it l stands well below the levels reported in 2006, 2007 and 2008. This shows that the management and control systems are working better for the current programming period compared to the previous one.

This increase is partly due to the expenditure cycle in cohesion. Most of the programmes started in the past years were to be paid for as from 2010. Therefore, the amount of interim or final payments increased substantially in all Member States concerned.

However, the main sources of errors relate to weaknesses found in a limited number programmes in a few Member States and consists of eligibility and public procurement errors.

Therefore, the Commission is focusing its assistance and enhancing its supervision on these weakest actors. The objective is twofold.

- first to support these actors in putting their systems on track and,

- second, where necessary, to activate timely preventive mechanisms (interruption and suspension of payments) to protect the financial interests of the Union.

In 2010, the Commission has repeatedly used the preventive and corrective measures at its disposal. For instance, as regards the European Regional Development Fund, the Commission has interrupted payments worth of € 2.15 billion euro to the Member States´ managing authorities. The corresponding amount for the Social Fund was € 255 million.

The mandatory annual reporting by the managing authorities in the Member States started to be implemented at the end of 2010. The Commission estimates that this new obligation will provide more information and assurance as regards the way the national authorities are implementing the Cohesion policy programmes under the current period.

The Commission aims at further improvements of the EU funds management in the next generation programmes. With this in view, it has proposed to base its relationship with the Member States on partnership contracts.

The Commission will monitor carefully how the Member States achieve the targets set and respect conditionalities included in these partnership contracts.

The Commission proposes also a new control framework based on audited annual accounts which will receive assurance from the national management authorities every year.

It proposes as well to introduce a new concept: the "net financial correction" in the Cohesion policy. It means that Member States would loose definitely part of the EU funds allocated to them if their systems fail to detect and correct irregularities before submitting the reimbursement claims to the Commission.

I wish to remind that error does not mean fraud. Its occurrence does not mean that funds have disappeared, been lost or wasted. It means that some projects were affected by weaknesses in their implementation, such as the declaration of ineligible expenses or mistakes in the calculation of expenses.

Finally, as regards the performance of the Union's programmes, the Court's special reports are a very valuable contribution. They foster further improvements of the way Commission's services and other actors should monitor progress and make sure the funded activities deliver added-value.

In the MFF communication adopted in June this year, the Commission highlighted the priority it intends to give to a "result-oriented approach" in the design of the next generation of programmes.

The identification of objectives, targets, milestones and key performance indicators are now systematically included in all our legislative proposals.

Moreover, by the end of this year, the Commission will issue the very first evaluation report based on Article 318 of the Treaty.

Honorable Members of this Committee and of the Court of Auditors, I am pleased the European Court of Auditors confirms that the Commission is on the right track. The Commission and is aware of current problems. It takes full responsibility to address the areas where improvements are needed.

We are aware that further efforts are needed and that these efforts should be shared by all financial actors involved, not the least the national authorities.

Several new measures included in our proposals for the next generation of EU spending programmes are inspired by the Court and the Discharge authority's recommendations, especially in policies managed together with the Member States.

Our proposals reflect in particular the need for more simplification, transparency, enhanced accountability by all financial actors and cost-effective control mechanisms.

Whether these measures will become the EU law depends now mainly on the co-legislators. The Commission's position is clearly disclosed in its proposals, so is its commitment to further improve the protection of the EU financial interests.

In the upcoming months several of my colleagues and myself will be present here in this Committee to reply to your questions. I am looking forward to a constructive and fruitful debate on the discharge for the financial year 2010.

Ladies and Gentlemen, thank you for your attention.

Concluding Remarks

Dear Chairman, Mr. Rapporteur, President Caldeira, Honorable Members of this Committee and of the Court of Auditors,

Our discussion today indicates that part of our discussion and efforts will focus on those European programmes which are directly managed by the Member States, in particular in the area of Cohesion.

The Commission has forwarded to you a detailed analysis of the errors detected in these programmes and I would like here to repeat the availability of my colleagues Johannes Hahn and Lazlo Andor to come to you and present the results of this very interesting analysis.

As we speak, the Commission is working on the issues identified in the 2009 discharge resolution and the new findings disclosed in the Court's report on the 2010 budget year.

For the future, major proposals for the next Multiannual financial framework have been tabled already for Cohesion and Agriculture policies. You will find in these proposals how the Commission has duly taken into account your recommendations.

Other proposals will follow until the end of this year and will include as well the necessary provisions aiming at improving further the financial management of the EU funds.

The debate today demonstrates that we are sharing the same objectives with the discharge authority.

I am looking forward to a constructive and fruitful debate with all of you, and I would also like to ensure you that the Commission will provide you with all necessary support, as it did in the past.